Quick Facts

Luxembourg’s economic freedom score is 73.2, making its economy the 21st freest in the 2015 Index. Its overall score has decreased by 1.0 point since last year, with declines in the management of government spending, freedom from corruption, and business freedom outweighing improvements in monetary freedom and trade freedom. Luxembourg is ranked 10th out of 43 countries in the Europe region, and its overall score continues to be above the world and regional averages.

Luxembourg’s economic freedom score has fallen steadily for five years. A decline of 3.0 points has been led by double-digit drops in the management of public finance and in policy areas related to regulatory efficiency. Once a “free” economy, Luxembourg has dropped to well within the ranks of the “mostly free.”

Small and landlocked, Luxembourg has made engagement with the global economy the cornerstone of its economic policy. Investment freedom, the world’s most highly ranked, has led to the development of a robust banking sector. Regulations are relatively efficient, but labor markets are somewhat inelastic. Fiscal accounts must be managed more prudently for the economy to promote growth and return to the top ranks of the Index.

Background

A founding member of the European Union in 1957 and the euro in 1999, the Grand Duchy of Luxembourg continues to promote European integration. Prime Minister Xavier Bettel of the Democratic Party was elected in December 2013, defeating the Christian Social People’s Party that had been in power since 1979. Luxembourgers have one of the world’s highest income levels, although the global economic crisis provoked the first recession in 60 years in 2009. During the 20th century, Luxembourg evolved into a mixed manufacturing and services economy with incredibly strong financial services. The government is trying to diversify the economy by promoting Luxembourg as an information technology and e-commerce hub. The country has a skilled workforce and well-developed infrastructure.

The government is largely free from corruption, but the prime minister resigned in July 2013 amid disclosures of abuses by the State Intelligence Service, including secret recordings of politicians taking payments in return for access to local officials. The judiciary is independent, and the legal framework strongly supports the rule of law. Private property rights are protected, and contracts are secure.

The top individual income tax rate is 43.6 percent, and the top corporate tax rate is 21 percent. Other taxes include a surtax for the unemployment fund, a value-added tax, and an inheritance tax. Overall tax revenues amount to 37.8 percent of domestic output, and public expenditures are equivalent to 43.9 percent of domestic production. Public debt equals about 23 percent of gross domestic product.

The regulatory framework generally facilitates entrepreneurial activity. Launching a business takes six procedures, but obtaining necessary permits remains time-consuming. Hiring and dismissal regulations are burdensome, with generous fringe benefits among the world’s costliest. Monetary stability has been well maintained. The agricultural sector is highly subsidized by the government and through the EU’s Common Agricultural Policy.

EU members have a 1.0 percent average tariff rate. Although some non-tariff barriers exist, the EU is relatively open to external trade. Luxembourg treats foreign and domestic investors equally under the law. The competitive financial sector provides a wide range of financing options. As a global financial hub, the sophisticated banking sector remains well capitalized. The capital market is vibrant.